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Announcement:

Moody's affirms Wachovia's ratings, negative outlook remains

14 Apr 2008
Moody's affirms Wachovia's ratings, negative outlook remains

New York, April 14, 2008 -- Moody's Investors Service affirmed the ratings of Wachovia Corporation (senior at Aa3), and those of its lead bank, Wachovia Bank, N.A. The bank is rated B+ for financial strength and Aa1 for long-term deposits. Moody's also maintained its negative outlook on Wachovia.

The affirmation follows Wachovia's announcement of a $350 million loss in the first quarter 2008 and a targeted capital raise of $7 billion. The loss was driven by a sizable increase in its loan-loss provision that resulted in a $2.1 billion increase in Wachovia's loan-loss reserves and further charges in its investment bank. A major portion of the increase in the provision related to Wachovia's $120 billion option-adjustable-rate-mortgage (option-ARM) portfolio. Wachovia also reported it will raise $7 billion of capital in the form of common stock and perpetual convertible preferred stock. It also announced that it will cut its common dividend by 41% to approximately $800 million per quarter, down from $1.3 billion per quarter.

Moody's said Wachovia's ratings were affirmed because of management's initiatives to increase capital. According to Moody's, loss expectations on the firm's portfolio have increased, but this is more than offset by the additional capital that Wachovia will raise. Moody's said the capital initiative will result in Wachovia's having a large regulatory capital surplus ranging from approximately $15 to $19 billion. Wachovia's ratio of tangible common equity over risk-weighted assets -- a favored Moody's ratio -- should be around a very respectable 6%.

In evaluating the company's capital levels, the rating agency estimated that the life-time pre-tax loss on Wachovia's option-ARM portfolio would be $8.4 billion, and assumed that the loss provisioning will occur during the next four to six quarters.

Moody's said that in the first quarter 2008, asset quality indicators in the option-ARM portfolio deteriorated sharply and are appreciably worse than historical peak levels. "In the first quarter, the 90-day delinquency rate of the portfolio was 3.1%, which is twice the previous high during the last credit downturn in the early 1990s," said Moody's Senior Vice President Sean Jones. "Meanwhile, the annualized loss rate of 0.8% is four times the previous high," said Mr. Jones.

Moody's also stated that Wachovia's performance has been depressed by cumulative charges of $4.1 billion in the investment bank in the past three quarters. Further losses in its investment bank are likely, but Moody's expects them to be lower because of charges already taken and a noticeable decrease in inventory.

Moody's said it maintained a negative outlook on Wachovia because of the accelerated deterioration in Wachovia's option-ARM portfolio. "For Moody's to remove the negative outlook, we would want to see signs that the portfolio is stabilizing within our expectations," said Mr. Jones.

Moody's said that negative ratings actions would emerge if recent improvements in capital ratios were reversed because of larger-than-expected write-downs or loan-loss provisions.

"Wachovia faces this challenging environment not only with good capital ratios, but with plenty of liquidity," said Mr. Jones. The holding company has a sizable amount of surplus liquidity and the bank's liquidity is robust thanks to a firm core deposit base and a large unutilized capacity at the Federal Home Loan Bank.

Wachovia Corporation is headquartered in Charlotte, NC. Its reported assets were $809 billion at March 31, 2008.

New York
Gregory W. Bauer
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Sean Jones
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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